82 Pages Posted: 2 Apr 2015 Last revised: 12 Dec 2017
Date Written: April 24, 2015
We introduce a return predictor related to the slope and curvature of the futures term structure: basis-momentum. Basis-momentum strongly outperforms benchmark characteristics in predicting commodity spot and term premiums in the time series and cross section. Exposure to basis-momentum is priced among commodity-sorted portfolios and individual commodities. We argue that basis-momentum captures imbalances in the supply and demand of futures contracts that materialize when the market-clearing ability of speculators and intermediaries is impaired, and that basis-momentum represents compensation for priced risk. Our findings are inconsistent with alternative explanations based on storage, inventory, and hedging pressure.
Keywords: Basis-momentum, term structure of commodity futures returns, maturity-specific price pressure, commodity factor pricing model, volatility risk
JEL Classification: G12, G13
Suggested Citation: Suggested Citation